In order to sort through the disaster that is Wells Fargo’s commercial loan portfolio, the bank has hired help from outside experts to pore over the books . . . and they are shocked with what they are seeing. Not only do the bank’s outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank.

According to data from WLMlab.com, which tracks financial numbers that Wells files with its regulators, the bank’s construction and development portfolio, with $38.2 billion in loans, is defaulting at a level eight times greater than the rest of the nation’s banks, as of June 30th.

But Buhl, citing unidentified sources, says there’s another loss risk that stems from Wachovia’s use of derivative securities during the real estate boom. Wachovia, she says, routinely wrote credit default swaps on lower-quality slices of commercial mortgage-backed securities it sold to investors. That means the bank was essentially guaranteeing to eat the investors’ losses if the securities went bad.

From Buhl: "As we watch more and more of the junior tranches of commercial mortgage back securities Wachovia sold become worthless, how will Wells Fargo afford to pay for the risk premiums Wachovia promised they’d cover if the loans blew up?"

Wells has continued to sound supremely confident that it made the right move buying Wachovia last year without government help. But investors have been treating the bank’s stock with relative caution in recent months compared with the action in other bank issues.

Wells’ shares, at $28.78 today, are up 18.6% since June 30, well short of the 31.3% gain in the BKX index of 24 major bank stocks.